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Real Estate Fee-Splitting Restored: Ruling Strikes Down Broker Restrictions

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RISMEDIA, Sept. 13, 2007-(MCT)-A Kentucky law that requires real estate brokers to be licensed in this state before dealing in Kentucky real estate was upheld by a federal judge in Louisville last week. But Judge Charles R. Simpson III struck down two related laws that prohibit Kentucky brokers from “aiding and abetting” or splitting fees with out-of-state brokers, saying the laws impede interstate commerce.The rulings poke holes in Kentucky’s so-called turf state policy that is intended to protect residents from corrupt or incompetent brokers. “These provisions effectively force both owners and purchasers of Kentucky real estate to work with only Kentucky licensed brokers,” Simpson wrote.

The provisions also ensure that “virtually all” sales commissions go to Kentucky brokers, he said. In addition, they inhibit the marketing of Kentucky properties to buyers in other states.

Simpson issued a preliminary injunction barring the Kentucky Real Estate Commission from enforcing the laws he struck down.

The commission has not decided whether to appeal the ruling, said Norman Brown, its executive director. Brown, who is a defendant in the lawsuit, declined further comment.

In response to the ruling, the Kentucky Association of Realtors said it is “very pleased” that the court upheld the state’s licensing law.

“We feel a favorable decision was reached for all parties involved,” said association President Carl Tackett. The ruling “will benefit property owners and will hopefully drive more business opportunities to the state.”

The lawsuit was filed in 2006 by two commercial real estate investors: River Oaks Management Co. and 8177 Mall Road Investors, who are clients of the national firm of Marcus & Millichap Real Estate Investment Brokerage Co.

River Oaks, based in Chicago, has four properties in Lexington while Atlanta-based 8177 Mall Road Investors owns commercial property in Florence.

The plaintiffs contend that the commission was unconstitutionally blocking cooperation among brokers licensed in Kentucky and those licensed in other states, and that Kentucky’s turf state policy discriminated against brokers licensed outside of Kentucky.

Simpson upheld the licensing requirements, saying there are no barriers to prevent out-of-state brokers from getting a Kentucky license.

He said laws against fee splitting and cooperating with out-of-state brokers benefited Realtors, but not out-of-state clients who often have to change Realtors to do business in Kentucky.

“A customer who maintains a trusted relationship with a broker should not be compelled to accept the services of a stranger in order to make that transaction,” Simpson wrote.
He also proposed “a reasonable alternative.”

“Kentucky’s goal of protecting the public from incompetent and unscrupulous brokers can be accomplished by requiring an out-of-state broker to partner with a Kentucky licensed broker who would oversee the transaction and be responsible for the actions of the out-of-state broker … to ensure that Kentucky’s … laws are followed, while still permitting the free flow of interstate commerce.”

The case is River Oaks Management, et al., versus Norman Brown, et al. The case number is 06-451.

Copyright © 2007, The Lexington Herald-Leader, Ky.
Distributed by McClatchy-Tribune Information Services.

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